Inter-Korean summit boosts some stocks

Stocks related to inter-Korean cooperation are skyrocketing on favorable projections for the two countries’ summit scheduled for this Friday.

On Monday alone, seven shares reached their daily limit of a 30 percent price rise.

The stocks included Haein, Shinwon Corporation preferred stocks, Ilsung Construction, Soosan Heavy Industries, Dongbu Construction, Korea Petroleum and Sambu Construction.

Other civil engineering, construction and cement shares also rose sharply, including Hyundai E&C preferred stocks, which rose 27.13 percent, Union Cement, which gained 19.14 percent and Ilshin Stone, which rose 18.85 percent.

The recent increase in these shares reflects the growing expectations for economic cooperation between the two Koreas, including the reopening of the Kaesong Industrial Complex, which was shut down by the conservative Park Geun-hye administration.

In protest of the North’s nuclear and missile tests, the Park government announced on Feb. 10, 2016, that it was closing down the Kaesong Industrial Plant.

Others projects that are gaining attention are the proposed Northeast Asian “super grid” project that would link the electrical grids of the Koreas, China, Mongolia and eastern Russia and the trans-Korean railroad that could travel the length of the Korean peninsula to Russia.

Some also are hopeful that South Korean tourism to North Korea, which has been shut down since 2008, might be revived.

“There’s a strong passion to improve the [frozen] relationship between the two Koreas, with President Moon Jae-in planning to announce the end of the Korean War during the summit,” said Park So-yeon, an analyst at Korea Investment & Securities. “The market is responding quickly to it.”

Thawing tensions on the peninsula are also improving the nation’s sovereign risk, as the credit default swap (CDS) index, which is used in measuring the sovereign risk of a country, fell slightly.

South Korea’s CDS premium, which rose to 76 basis points last year as tensions between the United States and North Korea intensified over Pyongyang’s nuclear and missile tests, fell to 48 basis points as of last week.

The lower the premium is, the less sovereign risk a country is perceived to have.

These favorable sentiments were also reaffirmed in a meeting between South Korean Finance Minister Kim Dong-yeon and the heads of three global credit rating agencies — the S&P, Fitch and Moody’s — in Washington. Kim was participating in the G-20 Finance Ministers and Central Bank Governors meeting.

According to the Finance Ministry, during meetings between April 20 and 22, all three agencies agreed that geopolitical risks have been easing. They expressed keen interest in the results of the inter-Korean summit set for later this week.

The finance minister, in response, said he hopes that the summit will be reflected in Korea’s credit rating.

However, some market analysts warned against too much optimism.

“The recent bullish rallies of these North-South economic cooperation shares are based on future expectations,” said Choi Kwang-hyuk, an analyst at eBest Investment & Securities. “But just because the Kaesong Industrial Complex is back online doesn’t mean the companies that will be stationed there would be profitable immediately.”

SK Securities’ analyst Ahn Young-jin said that when looking at past summits between the two Koreas, the share values of companies related to inter-Korean cooperation spiked before the meeting took place but fell back to their average trading prices afterwards.

“Because the talks involve other countries, such as the United States and China, it will be difficult to expect a fundamental solution coming out of the North-South Korea summit,” Ahn said. “There’s a lot of process that needs to be made including getting the approval of the National Assembly [on economic cooperation].”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]